Eye Share: Is FATCA a Permissible Treaty Override for Withholding Rates?

Abstract

Tax treaties are legal agreements entered into by the states and is governed by the Vienna Convention on The Law of Treaties, 1980 (‘VCLT’). In a situation of conflict, principles of VCLT are referred to give a fair interpretation. The preamble and Article 26 of VCLT provides that the parties to the treaty must perform the obligations undertaken by them in a treaty in good faith i.e. the obligation of pacta sunt servanda. Article 27 of VCLT in extension to this provides that invoking of internal law is not a valid reason for non fulfillment of the treaty obligations. According to the general rules of interpretation mentioned in Article 31 of the VCLT, the interpretation of the tax treaties must be done in the light of the object of the treaties i.e. to avoid double taxation and to prevent treaty abuse. The interpretation intended can be arrived at by either a mutually agreed procedure or any other means mutually acceptable.The increasing use of favourable treaty network for abuse has forced the states to make amendments in its domestic tax laws so as to get its fair share of tax. However, the change in the domestic tax laws of any of the state in contravention to the treaty entered by it without the consent of the other parties amounts to breach of the treaty. Such amendments brought with a view to unilaterally override the tax treaty gives the other parties an opportunity to ask for specific performance/suspension or termination of the treaty. For example, on June 29, 1987 the US-Netherlands Antilles Tax Treaty was terminated by the United States.